60% Total Stock Fund and 40% Total Bond Fund or Balanced Mutual Fund?

[Digital Nomad]

Retiring soon and most of the money in my IRA is a balanced mutual fund that is 60% stocks and 40% bonds. I wonder if I made a mistake and should have broken the investments into two funds. (Like 60% VTI and 40% FTBFX).

That way if the stock market crashes and I have to withdraw funds I can take money only out of my bond fund (FTBFX) until the market recovers. Vs if I only have money in a balanced mutual fund I will be forced to sell an investment that is 60% stocks locking in my losses.

Anyone here scared of owning only balanced funds during terrible bear markets?

(Or do you prefer a balanced fund because you don't have to worry about rebalancing your investments?)

 

[OldShooter]

A balanced fund is not a good idea for the exact reason you mentioned. In addition it keeps you from seeing the individual performance of the two components.

 

[street]

I would advise having two funds and not a balanced fund. The reason is for what you mentioned when selling your investments.

As far as rebalancing, that really is an unique action depending on the persons financial plan.

Some never rebalance no matter how they have invested and some do for their financial needs and plan.

I don't know if there is a right way or wrong way in your present investing. A good plan for what you want that investment to look like in 20 years is the actions you should work for now.

 

[walkinwood]

Rebalancing in the dropping stock market is difficult to do. If you're sure you can do that in a disciplined way, then 2 funds makes sense.


I wouldn't worry about "locking in losses" After withdrawal & rebalance, you'll end up with the same amount of money in equities and bonds whether you do it with two funds or with a balanced fund. Try it out in a spreadsheet if it isn't intuitive.


Full disclosure : I don't have balanced funds and I have found it hard to rebalance in downturns. I did nothing when stocks dropped early in 2020. Also, I didn't think through any tax implications of balanced funds v/s two funds.

 

[Niuatoputapu]

If the conditions include maintenance of the 60/40 allocation, then 'two funds" versus "balanced fund" does not make a difference. In the two fund case, if you withdraw from the bond fund, then you would have to sell stock and buy bonds to maintain the 60/40 split. That is no different than to have your withdrawal be 60% from stock and 40% from bond.

If the 60/40 allocation is not a condition, then anything goes.

In my case, I have always preferred the two fund method, but I am slowly moving to balanced fund because it will be easier for DW if I pass first.

 

[Badger]

Do you not have any cash/CD/etc. in an emergency fund (6 months, a year, 2 years, etc.) to see you through a crash?


Cheers!

 

[easysurfer]

I was contemplating this very thing this morning.

My AA allocation strategy is the 100-age formula with different asset classes. But was wondering will there be a time (the older I get, the less I care about details) when I just like have a Money Market for cash, along with just a single fund like a 60/40 balanced. A balanced would makes things easier to maintain, but will that be risky during a bear market?

For my HSA I just use a 60/40 balanced fund and don't count that with my regular investments.

 

[bloom2708]

The result should be the same. The single balanced fund will be easier to maintain as it will re-balance for you.

If you go to 2 funds and the stock side drops, you should re-balance from bonds to stocks. The rebalance band is the difference. The single fund will always be balanced daily. The 2 funds, you could re-balance at 1%, 5% or some other number, meaning you will likely always be slightly off 60/40.

If the one fund is working, I would not switch for the reason you mentioned. Having some Emergency Fund or cash/money market would allow you to not sell during certain periods.

 

[ERObjd]

We have Vanguard vbiax and it is 60% stock 40% bond and Vanguard keeps that balance. Also Vanguard Star fund which is about 60 40 as well.it is a fund of funds and stays balance at 60 /40. Had wellington for a short time but decided to switch to Star fund.We also have Fidelity fzrox total stock market fund which is 100% large,medium and small capstocks.no bonds in our fidelity account at all.

 

[walkinwood]

I just thought of one reason to use two funds. If your portfolio is distributed between taxable, T-IRA and ROTH IRAs, you may want to use separate stock and bond funds so you can locate your assets optimally.

 

[friar1610]

I use VBIAX rather than the two separate funds in my Roth IRA. My goal is to never access the Roth and to leave it as a legacy. So it’s simpler to just to have the one fund. The older I get the better simplicity is looking.

 

[GravitySucks]

I don't keep a balanced fund or only 2 fund portfolio but:

One reason to not use the balanced fund is if we end up in a 1929 type scenario. I would rebalance some, but not to the point were I don't have at least 7 years of bonds left to meet expenses.

 

[pb4uski]

I'll take the contrarian view... I don't think it matters much.

I compared VBIAX (a 60/40 balanced fund) with a 60/40 blend of Vanguard Total Stock and Vanguard Total Bond... $10,000 starting balance with $400 annual withdrawal adjusted for inflation and annual rebalancing.

Portfolio	Initial Balance	Final Balance	CAGR	TWRR	MWRR	Stdev	Best Year	Worst Year	Max. Drawdown	Sharpe Ratio	Sortino Ratio	US Mkt Correlation
Portfolio 1	$10,000	$16,150	2.34%	7.21%	6.29%	9.18%	21.79%	-22.12%	-32.45%	0.66	0.98	0.99
Portfolio 2	$10,000	$16,250	2.37%	7.20%	6.31%	8.98%	21.83%	-20.20%	-30.72%	0.67	1.00	0.99

 

[RunningBum]

I'll take the contrarian view... I don't think it matters much.

I compared VBIAX (a 60/40 balanced fund) with a 60/40 blend of Vanguard Total Stock and Vanguard Total Bond... $10,000 starting balance with $400 annual withdrawal adjusted for inflation and annual rebalancing.

The issue is as the OP said, if the market crashes then you can't just liquidate the bond part of a balanced fund. And if it was in taxable you couldn't tax loss harvest as efficiently.

 

[pb4uski]

On the last part, the OP also said that these are all in an IRA, so I don't see your point.

 

[Markola]

If the conditions include maintenance of the 60/40 allocation, then 'two funds" versus "balanced fund" does not make a difference. In the two fund case, if you withdraw from the bond fund, then you would have to sell stock and buy bonds to maintain the 60/40 split. That is no different than to have your withdrawal be 60% from stock and 40% from bond.

Agree. If the investor intends to maintain their allocation, any benefit to this sort of “slow-motion rebalancing” during and after stock bear markets vs. daily, quarterly, yearly, randomly, with rebalancing bands or not at all is only psychological. The following example reflects that a two fund strategy is outperforming at the moment but odds are strong that it will return to neck and neck with the balanced fund soon enough when stocks tumble again.

 

[mrfeh]

Retiring soon and most of the money in my IRA is a balanced mutual fund that is 60% stocks and 40% bonds. I wonder if I made a mistake and should have broken the investments into two funds. (Like 60% VTI and 40% FTBFX).

That way if the stock market crashes and I have to withdraw funds I can take money only out of my bond fund (FTBFX) until the market recovers. Vs if I only have money in a balanced mutual fund I will be forced to sell an investment that is 60% stocks locking in my losses.

Anyone here scared of owning only balanced funds during terrible bear markets?

(Or do you prefer a balanced fund because you don't have to worry about rebalancing your investments?)

Keep equities and fixed income separate.

https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

 

[FloridaJim57]

I would go with Vanguard's Wellington fund which is about 65% stock. Or you can go with Wellesley which has less stock allocation. Or put half your money in one, and half in the other.

 

[Time2]

The old adage, "as you get older you should move some of your stocks into bonds", for me has lost some of it's appeal. Does anyone else see that there is not as much counter-tandem movement, i.e. bonds go down, stocks go up and vise versa.

With bond yields at a low, they have no where to go but up, meaning the dollar value of your bonds will go down. At the same time if yields on bonds go up, some stock money will move to bonds dragging down the stock market.
Bonds to me just seem like a catch-22.
I just haven't been able to pull the trigger on bonds.

 

[mrfeh]

The old adage, "as you get older you should move some of your stocks into bonds", for me has lost some of it's appeal. Does anyone else see that there is not as much counter-tandem movement, i.e. bonds go down, stocks go up and vise versa.

With bond yields at a low, they have no where to go but up, meaning the dollar value of your bonds will go down. At the same time if yields on bonds go up, some stock money will move to bonds dragging down the stock market.
Bonds to me just seem like a catch-22.
I just haven't been able to pull the trigger on bonds.

For long term bond fund holders, interest rates going up is a good thing.

Do some searches on bogleheads.org for reams and reams of reading on the subject.

 

[pb4uski]

The old adage, "as you get older you should move some of your stocks into bonds", for me has lost some of it's appeal. Does anyone else see that there is not as much counter-tandem movement, i.e. bonds go down, stocks go up and vise versa.

With bond yields at a low, they have no where to go but up, meaning the dollar value of your bonds will go down. At the same time if yields on bonds go up, some stock money will move to bonds dragging down the stock market.
Bonds to me just seem like a catch-22.
I just haven't been able to pull the trigger on bonds.

+1 At this juncture bonds seem like return-free risk. Yields are pathetically low and it seems that interest rate risk is high (but OTOH, I've been thinking that for years and it hasn't occurred yet due to the Fed's intervention).

I don't currently own any bonds or bond funds. My fixed income is mostly in 3.0%-3.5% 5-year CDs that I bought in 2019 (41% of portfolio) and preferred stocks that are mosty investment grade credits and yield about 5.25% (39% of portfolio) and a small whole life insurance policy that I bought as a naive 22-year old from a "family friend" that is currently yielded about 2.5% in the last policy year (2% of portfolio).

 

[Time2]

For long term bond fund holders, interest rates going up is a good thing.

There may indeed be a difference between a bond and a bond fund.

But even with a bond fund when rates go up, your bond fund value will go down, as bonds mature, the fund will invest in new higher rate bonds increasing your yield, but I suspect that will be a lagging change.

 

[mrfeh]

There may indeed be a difference between a bond and a bond fund.

But even with a bond fund when rates go up, your bond fund value will go down, as bonds mature, the fund will invest in new higher rate bonds increasing your yield, but I suspect that will be a lagging change.

Yes, but if holding for the long term, one should not care about short-term NAV changes.

That seems to be where many people go wrong.

 

[Time2]

Yes, but if holding for the long term, one should not care about short-term NAV changes.

That seems to be where many people go wrong.

Yes, I may have been subject to a bias, as I have on older friend that reports often how his net worth numbers are often skewed downward because of the lowered value of his bonds, but in reality, he will recoup the full value at maturity.

Interesting take.

 

[yakers]

I use VBIAX rather than the two separate funds in my Roth IRA. My goal is to never access the Roth and to leave it as a legacy. So it’s simpler to just to have the one fund. The older I get the better simplicity is looking.

Exactly what we are doing. Roths are ‘saved’ for 2 sons. Told them this is the last thing we will spend if we have to. Still in VBIAX 60/40 as part of our overall AA, after all it is still an emergency/fallback system.